What happens when a spouse or other third party co-owns a house with someone who has a sizable federal tax liability? IRS seizures to satisfy an assessment are relatively rare. IRS attempts to enforce a lien and foreclose on a home are even rarer. And forced sales of homes when one of the co-owners of the house owes none of the taxes probably occurs only a handful of times a year.
We are in the process of reviewing cases and other developments that we have read over the past few months as we gear up to complete the last of the three updates we do annually for the Thomson Reuters treatise IRS Practice and Procedure. Earlier this year I read US v Tannenbaum, a case out of the Eastern District in New York where the IRS sought to enforce its lien and foreclose and sell upon a marital home in Brooklyn that was shared by the Tannenbaums, Sarah and Gershon. I flagged Tannenbaum for inclusion in our discussion of the government’s authority to force the sale of co-owned property under Section 7403.
Including interest and penalties Gershon unfortunately had run up a couple of million dollars in income tax liabilities. I am not sure if he filed MFS or if Sarah were relieved of the liabilities via Section 6015; the opinion is silent but Sarah was not on the hook for those assessments. Since 1977, the Tannenbaums jointly owned a house in Brooklyn that had an appraised value of over $1.2 million (a far cry from the Brooklyn home values when I was born and lived there in the days of Mayor Lindsay).
While the tax assessment only related to Gershon, both had some history with the government. In the mid 90’s both Sarah and Gershon had been indicted for conspiracy to defraud or commit an offense against the US and for false statements made to the IRS. Gershon pleaded guilty to the conspiracy charges and Sarah entered into a deferred prosecution agreement and all charges were dropped against her. Gershon had been sentenced to a year and a day and supervised release.
That background takes us to the case at hand and likely matters in terms of how the government approached this case. IRS sought to enforce the assessment against Gershon by foreclosing on and forcing the sale of their Brooklyn house. Both lived in the house, where they raised their children and also now lived with Sarah’s disabled mom. The house was specially set up to accommodate Sarah’s mom, who was in her 80’s and bound to a wheelchair.
This takes us to an issue that we discuss heavily in the Saltz/Book treatise, courtesy of Keith who has taken the lead oar as primary author on the revised collection chapters. Under Section 7403, a federal district court can “determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property,…, and a distribution of the proceeds of such sale according to the findings of the court.
Yet that power to force a sale and distribution of the proceeds is limited. In the 1983 case US v Rodgers the Supreme Court said that while the government has broad discretion to force a sale, “Section 7403 does not require a district court to authorize a forced sale under absolutely all circumstances, and that some limited room is left in the statute for the exercise of reasoned discretion.” Keith has discussed the application of Rodgers in prior posts here and here
To assist courts in exercising that discretion, Rodgers identifies factors:
1) “the extent to which the Government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes[;]”
(2) “whether the third party with a nonliable separate interest in the property would, in the normal course of events (leaving aside § 7403 and eminent domain proceedings, of course), have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors[;]”
(3) “the likely prejudice to the third party, both in personal dislocation costs and … practical undercompensation [;]” and
(4) “the relative character and value of the nonliable and liable interests held in the property ….”
The Tannebaum opinion applies these factors to the case at hand. While I will not discuss all the factors here, usually the most interesting part of these cases considers the prejudice to the non liable party if there is a forced sale. Of course, when the government comes in and kicks you out of your marital residence (and one that here was the marital home for close to 40 years) there is going to be prejudice.
What is too much in terms of prejudice? Sarah starts off at an atmospheric disadvantage because of her (and Gershon’s) prior history with the government. It did not help that Gershon’s mother had bequeathed a condo to Sarah and Gershon’s sister in what looks like an attempt to transfer assets outside the reach of creditors, including Uncle Sam. In addition, the opinion suggests that Sarah had other assets at her disposal and upon sale of the Brooklyn house, she would be entitled to about $600,000, as the government offered to split the sale proceeds of the Brooklyn house equally.
Those facts led the court to conclude that there was little prejudice to Sarah if the government would go ahead with the sale, as Sarah could find somewhere else to live.
Despite those facts that were stacked up against Sarah I did find one aspect of her prejudice argument to be interesting. She emphasized that in thinking about prejudice the court should “consider intangible factors” and “other common sense special circumstances.” In particular, Sarah noted that the forced sale would also impact her elderly and disabled mom, who lived with Gershon and Sarah in Brooklyn. She also pointed to the unique character of the neighborhood, which was predominantly Orthodox Jewish, as were the Tannenbaums. To top it off, she included in her papers an affidavit from a local real estate broker who noted that there was little market turnover in the neighborhood and that the house had additional value to elderly residents due to its proximity to a hospital.
The court agreed with Sarah on the principle that intangible factors matter but in the end concluded that the mom’s presence and the neighborhood’s character did not tip the scales on prejudice. First, on the mom:
The Court sympathizes with Sarah Tannenbaum concerning the care of her mother. But the evidence does not support Sarah Tannenbaum’s argument that she is short on resources. First, her financial resources are not limited to her salary, an amount that she has not disclosed.
The opinion then discussed that she and her sister in law sold the condo they inherited from Gershon’s mom and that all things considered Sarah (and her mom) would be ok if the IRS sold the marital home given the assets she had at her disposal:
Nonetheless, her share of the Condo sales proceeds, $350,000, plus the approximately $600,000 that she is anticipated to receive from the sale of the Home, mean that Sarah Tannenbaum will have $950,000 to lease or buy another home that can accommodate the Tannenbaums and Sarah Tannenbaum’s mother. Although neither side presented any evidence of the cost of leasing or buying an apartment or house in this neighborhood, the Court finds that $950,000 should suffice where the Tannenbaums can look for a smaller home, and the amount is not far off from the $1.2 million estimated market value of the Home. The Court is not aware of any controlling law, nor does Sarah Tannenbaum bring any to the Court’s attention, holding that a non-liable party is prejudiced if that party has to lease rather than buy a home.
The opinion noted that there were other Orthodox communities even if there were few alternates in the specific neighborhood. At the end of the day, however, while the court acknowledged the relevance of Sarah’s special circumstances, her resources were enough to tip that factor in favor of the government.
After applying all the Rodgers factors, the district court held that IRS had the right to force the sale of the Brooklyn house. Interestingly, the government argued that one of the factors in its favor was the prejudice to the government if it did not permit the forced sale. It is hard to force a sale of half a house, so there is always some prejudice if a court does not permit the sale of the entire property.
But there is more. Here the government pointed out that under NY law if Gershon were to die the US would not have the right to collect because its lien would be extinguished. Earlier this year and in fact prior to the court order setting the sale Gershon in fact did pass away (See Brooklyn, NY – Jewish Community Mourns The Sudden Loss Of Rabbi Gershon Tannenbaum ). The court was not aware of his passing when it wrote the opinion as the opinion noted Gershon failed to file any responsive papers. I suspect that the rabbi’s passing may then have extinguished the government’s interest in the residence, which would allow Sarah to remain in the house and give her the relief she sought. After the court issued its opinion, Sarah in fact filed a motion effectively asking the court seeking relief from a final judgment; the government has yet to respond and last week filed a motion seeking additional time to respond.